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Following the June 30, 2014,
filing deadline for FinCEN Form 114, Report
of Foreign Bank and Financial Accounts (FBAR), owners of reportable
foreign accounts and those with signature authority
over those accounts now find themselves either in
compliance or delinquent. Some reading this item may
be unsure into which category they or their
respective businesses fall; others may be aware that
they are delinquent and wonder whether any
procedures are available for relief from civil or
criminal penalties.

This item highlights two
nuances of the scope of the FBAR reporting
requirements that commonly result in filing
missteps. For those who are delinquent, this item
offers guidance on potential relief from penalties
in accordance with applicable IRS procedures.

Scope of Reporting
Requirement

Subject to certain exceptions
discussed below, the Bank Secrecy Act, P.L. 91-508,
and corresponding regulations impose the FBAR
reporting requirement on "[e]ach United States
person having a financial interest in, or signature
or other authority over, a bank, securities, or
other financial account in a foreign country"(31 C.F.R.
§1010.350(a)). Understanding the definitions of these
terms is crucial to knowing the extent of one's FBAR
filing obligations. However, the regulations'
definitions of these terms contain more intricate or
less obvious meanings, the nuances of which can pose
traps for the unwary.

Two areas that most
often cause compliance issues for FBAR filers are:

U.S. persons who have a controlling
interest in a foreign entity that owns reportable
accounts; and

The regulatory
exceptions to the signature authority filing
requirement, particularly as affected by the recent
extension of the FBAR filing deadline for certain
types of employees of U.S. and foreign entities.

Financial interest:In
addition to having a financial interest in a foreign
account by directly owning the account, a U.S. person
is treated as having a financial interest in a foreign
account when the record owner or legal title holder of
the account is (1) a corporation in which the U.S.
person owns directly or indirectly more than 50% of
the voting power or the total value of the shares; (2)
a partnership in which the U.S. person owns directly
or indirectly more than 50% of the profits or capital;
or (3) any other entity in which the U.S. person owns
directly or indirectly more than 50% of the voting
power, total value of the equity interest or assets,
or interest in profits.

While this imputed
financial interest can result in increasing a U.S.
filer's FBAR obligations, it also permits some related
U.S. parties to file a single FBAR. If a U.S. entity
is the record owner or titleholder of a foreign
account and is more than 50% owned by another U.S.
person, then the U.S. person owning the U.S. entity
may file Form 114 as a consolidated report on behalf
of itself and the U.S. entity that is the record owner
or titleholder of the account.

One factor to
note when analyzing the FBAR obligations of a group of
entities is that a U.S. person's entity classification
for federal tax purposes is immaterial to determining
whether a U.S. person has an FBAR filing obligation.
Thus, disregarded U.S. entities that have no U.S. tax
filing obligations nonetheless may be required to file
an FBAR.

Signature or other
authority: Signature or other
authority is defined broadly as "the authority of
an individual (alone or in conjunction with another)
to control the disposition of money, funds, or other
assets held in a financial account by direct
communication (whether in writing or otherwise) to the
person with whom the financial account is
maintained" (31 C.F.R. §1010.350(f)(1)). Officers
and employees of companies who may be covered by this
definition should understand that while they may
delegate the filing of Form 114 to a third party, any
officer or employee with a reporting obligation
remains personally liable for a delinquent filing.

There are several exceptions to the
"signature or other authority" filing
requirement when one does not also have a financial
interest in the foreign financial account over which
the person would otherwise be considered to have
signature authority. Those falling into the following
categories are not required to file on account of
their having signature or other authority over a
foreign financial account:

An officer
or employee of a financial institution that is
registered with and examined by the SEC or Commodity
Futures Trading Commission;

An officer
or employee of an "authorized service
provider" need not report that he or she has
signature or other authority over a foreign
financial account owned or maintained by an
investment company that is registered with the SEC.
"Authorized service provider" means an
entity that is registered with and examined by the
SEC and provides services to an investment company
registered under the Investment Company Act of 1940;

An officer or employee of an entity with
a class of equity securities listed (or American
depository receipts listed) on any U.S. national
securities exchange or an officer or employee of a
U.S. subsidiary of a U.S. entity with a class of
equity securities listed on a U.S. national
securities exchange need not file a report
concerning signature or other authority over a
foreign financial account of the subsidiary; or

An officer or employee of an entity that
has a class of equity securities registered (or
American depository receipts in respect of equity
securities registered) under Section 12(g) of the
Securities Exchange Act (see 31 C.F.R.
§§1010.350(f)(2)(i)-(v)).

Beginning
for 2010, the IRS and Treasury's Financial Crimes
Enforcement Network (FinCEN) have issued a series of
notices that postpone the FBAR due date for certain
individuals with signature authority over foreign
financial accounts of their employer or a closely
related entity. The most recent of these notices,
FinCEN Notice 2013-1, FBAR
Filing Requirement-Extended Filing Date Related to
Notice 2012-2, extends the due date for
filing until June 30, 2015, for officers and employees
covered by the notices who have signature or other
authority over the reportable foreign accounts of the
U.S. or foreign entities. To determine if officers and
employees have an FBAR filing obligation, companies
and their affected officers/employees must determine
who the employer is and who owns the account.

It is important to note that postponement under the
FinCEN notices does not relieve anyone of the duty to
gather the information; FBARs for all years since 2010
will have to be filed in 2015 if the rules are not
modified to change the reporting requirements and if
an additional extension is not granted.

Questions have arisen about the scope of this
exception when a public company is involved in a joint
venture and owns exactly 50% or less of the venture
entity. The company's officers or employees, while
exempt from reporting the corporate accounts over
which they have signature or other authority,
nevertheless must file an FBAR reporting the joint
venture accounts over which they have signature or
other authority, because an entity is a controlled
entity of a public company only when the public
company owns or controls more than 50% of the
entity.

Potential Penalty Relief

A person who had an obligation to file Form 114
but who missed the June 30, 2014, filing deadline,
should review FAQ No. 17 of the IRS 2012
Offshore Voluntary Disclosure Program (OVDP). FAQ No.
17 permits delinquent filers to avoid the imposition
of penalties so long as the person files Form 114 and
reports any income from the accounts in question on a
tax return for that year. To obtain relief under FAQ
No. 17, the late filer should prepare a statement
detailing the circumstances that led to the late
filing and also should make sure, and represent, that
any income from the accounts has been properly
reported.

Because, at present, Form 114 does
not allow statements to be attached to electronic
filings, filers should retain a copy of any statement
for their records and be prepared to make it available
to the IRS upon request. The electronic Form 114 has a
section on the cover page where filers may select from
a dropdown menu of explanations for why the form is
being filed late. A filer may notify FinCEN and the
IRS that the delinquent Form 114 is being filed
pursuant to FAQ No. 17 by selecting "Other"
from this dropdown menu and including a more concise
explanation (the text box on the electronic form
allows 750 characters of text) indicating that the
form is being filed pursuant to FAQ No. 17.

EditorNotes

Annette Smith is a partner with
PricewaterhouseCoopers LLP, Washington National Tax
Services, in Washington.

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